When it comes to identifying the drivers of the savings and wealth gap of Hispanic Americans compared to white households, income is seen as a major factor, but a new study suggests there's more to the story.
In A Closer Look Into the Finances of Hispanic American Households, Morningstar set out to gain a better understanding of the extent of the U.S. racial wealth gap and its underlying causes, looking specifically at the current state of savings for Hispanic households based on data from the Panel Study of Income Dynamics.
At the median level, Hispanic households were found to have substantially lower assets, as well as lower savings rates than white households. For instance, the researchers found, among other things, that only 31% of Hispanic households with income (of at least a part-time job) report that they are currently participating in a workplace retirement plan—compared with 51% of white income-generating households. In addition, research based on the Federal Reserve’s 2019 Survey of Consumer Finances shows that the median Hispanic household has only $36,100 in wealth, which is less than 20% of the median white household.
Hispanic households are also 17% less likely than white households to have access to a retirement plan through their employer, and private retirement plans do not fill the gap, as only 8% of Hispanic households report having an individual retirement account or similar private plan.
Differences in participation may be due to a range of factors, from varying access to workplace retirement vehicles, to the choice to participate for those given access, to the financial capability to participate. “Given that retirement savings make up a significant portion of overall savings for everyday individuals, this lack in accessibility can have a large impact on the overall savings rates of Hispanic households,” write Samantha Lamas and Michael Thompson, behavioral researchers at Morningstar and co-authors of the report.
Overall, however, the lower savings rates of Hispanic households appear to be the result of a combination of accessibility issues, income disparities, educational and geographical differences, differences in how families allocate savings, and, based on existing research, a history of discrimination, the report further observes.
Income Factors
Not surprisingly, income is a major factor that drives savings rates across all households, yet its impact can be different based on ethnicity and nativity. For instance, the research found that every 10% increase in income is associated with a 0.48-percentage-point increase in the savings rate for white households. However, this results in only a 0.30-percentage-point increase for Hispanic households and only a 0.23-percentage-point increase for Hispanic households with adults born or raised outside the United States.
Moreover, even when accounting for a range of factors that may affect saving, Morningstar found that the median Hispanic household’s active savings rate is still 1.3 percentage points lower than white households. The researchers estimated this through regression models that simultaneously account for multiple factors including race, geographic region, urban versus rural location, income, household structure, as well as the age, nativity and education of the head of household.
Even when comparing those who have access to retirement accounts, the researchers found that Hispanic households’ retirement savings rate is lower than white households—this time by 0.21 percentage points—and income remains a key factor affecting retirement savings rates.
Low-Yield Assets
Hispanic households are also more likely to own wealth through low-yield assets and are not using other high-return vehicles to offset lower retirement savings. Compared with white households, Hispanic households hold more of their wealth in homes (48% versus 30%) and automobiles (11% versus 5%) and less wealth in nonretirement investment accounts (5% versus 11%) or businesses (4% versus 7%), the report shows.
“Existing research suggests that there is a progression of assets in relation to income, where individuals start with homes and vehicles then move on to higher-return assets as their income grows. So, consistently lower income may be a factor for why Hispanic household wealth may concentrate on lower-yield assets,” the Morningstar researchers observe.
Solutions to Boost Savings
To address persistent low retirement savings rates among Hispanic households, the researchers propose a few solutions. Noting that Hispanic households are more likely to borrow from retirement accounts compared with white households, one strategy to avoid this problem is having separate emergency savings accounts, which can be offered along with traditional retirement savings accounts, the report suggests.
Hispanic households would also benefit from employers that do more to simplify the savings process and set up automatic enrollment in workplace retirement plans. For workers who do not currently have access to plans, innovations, such as pooled-employer plans, may allow smaller employers to offer this benefit, as well as state-run IRAs.
Also, because of the broad diversity of Hispanic American households, the report suggests that educational initiatives to promote saving activity and trust in public and private wealth accumulation vehicles could benefit from targeted communications and multilanguage outreach.
